The amendments to the VAT Act effective from 1 January 2013 were promulgated in the State Gazette on 30 November 2012. The main changes that were introduced include (i) reducing the restrictions to the right to deduct input VAT on passenger cars, (ii) lifting the obligation to self-charge VAT for repairs of hired assets, (iii) providing taxpayers with the right to subsequently deduct input VAT on purchases that were initially used for non-taxable activities and (iv) introducing some new invoicing rules.

Following an infringement procedure for non-compliance of the national legislation with the provisions of Directive 2006/112/EC (“the EU VAT Directive”), the legislature now reintroduces to a certain extent the provisions regulating the right to deduct input VAT on motorcycles and vehicles that were in force prior to 2007. The main points that need to be highlighted are:

Input VAT on hired motorcycles/passenger cars
The amendments provide for a right to deduct input VAT on hired motorcycles and passenger cars, as well as on goods and services used for their maintenance, repair, improvement or operation (e.g. fuel, spare parts etc.).

Taxpayers should bear in mind that the restrictions on the right to deduct input VAT for hired vehicles where they are used for non-business purposes or for representative or entertainment purposes are still valid. We expect that the revenue authorities will require evidence for the business use of the hired vehicles in order to allow VAT deductions.

The position of the revenue administration in respect of finance leases is uncertain at this stage. In respect of payments under
open-end finance leases, since these represent supplies of services, from 1 January 2013 lessees should be able to deduct input VAT. Despite some arguments for enjoying VAT deductions, we would expect that the revenue office will not allow these for
close-end leases which qualify as supplies of goods.

Input VAT on acquired motorcycles and passenger cars – reintroducing the main activity condition
The current rule restricting the input VAT deductions for acquired motorcycles and passenger cars remains to a large extent unchanged: deductions are allowed only if the vehicles are used solely for the performance of qualifying supplies: resale, leasing, transportation services, courier services, etc.

With the amendments, businesses for which the qualifying supplies generate more than 50% of the revenues will be able to deduct input VAT even for the acquisition and use of vehicles which are not solely used for qualifying transactions.

Repairs made by tenants and lessees on hired assets would not be considered as deemed supplies for VAT purposes irrespective of the length of the lease period. Under the rules applicable until 2013, tenants and lessees have to self charge VAT when repairing hired assets provided that the rental term is less than three years.

Improvements of hired assets made by and at the expense of the tenants or lessees remain to be treated as deemed supplies in favour of the lessor which require that lessees and tenants self charge VAT on such improvements. The obligation for VAT self charge occurs in principle, as it is presently formulated, when the asset is returned to the lessor. However, a new derogation from this rule will apply when the improvements are made by lessees as a consequence of their contractual obligations under the rental contracts. The VAT obligation in these cases will arise in accordance with the clauses of the contracts, which needs to be determined on a case-by-case basis.

We should further mention that the Bulgarian rules treating improvements of hired assets as deemed supplies are being challenged before the ECJ in case С-283/12, Serebryanniy vek. Depending on the outcome of this case for which we will inform you accordingly, the above mentioned rules may be declared by the ECJ as incompliant with the EU VAT Directive with a retroactive effect.

As of 1 January 2013 taxpayers will be entitled to deduct input VAT on purchases that were initially used for non-taxable activities, where these are subsequently used solely for taxable supplies. The rules for calculating the deductible proportion are expected with the Regulations to the VAT Act.

The amendments transpose the provisions of Directive 2010/45/EU, which lays down invoicing rules intended to enhance legal certainty, bring about more uniform treatment between cross-border and domestic supplies and promote the use of electronic invoices.

Applicable invoicing rules
With the new provisions of the VAT Act coming
into force, the taxable persons will have a
better understanding of when the national
invoicing rules apply. Generally, the invoice
should comply with the requirements of the
jurisdiction of the supplier, apart from the
cases in which the supplier is liable for VAT in
another EU member state for supplies for which
VAT reverse charge mechanism does not apply.

Thus, Bulgarian companies may not observe
Bulgarian invoicing rules when they perform
supplies in another EU member through a fixed
establishment there. Foreign suppliers are
obliged to comply with the Bulgarian rules when
they perform supplies taxable in Bulgaria
through a Bulgarian fixed establishment or if
the Bulgarian VAT is not due by the recipient
through the reverse charge mechanism.

Invoicing simplification measures
Certain invoicing simplifications are also introduced. In particular, as of 1 January 2013 (i) a summary invoice for several separate supplies may be issued provided that the VAT becomes chargeable during the same calendar month and (ii) simplified invoices may be drawn where the taxable amount plus the VAT does not exceed EUR 100.

Business controls
Businesses need to maintain internal business controls that provide a reliable audit trail between the invoice and the supply in order to ensure the authenticity of the origin, the integrity of the content and the legibility of invoices throughout the period of their storage.

Electronic invoicing
Electronic invoices must be accepted explicitly or tacitly by the recipient.

Extension of the period for submission of list of available assets as at the VAT registration date
The period for submission of the list of available assets as at the VAT registration date allowing the deduction of input VAT suffered prior to VAT registration has been extended from 7 to 45 days.